-
Air Freight Industry White Paper
J. Petersen
The Supply Chain and Logistics Institute
H. Milton Stewart School of Industrial and Systems Engineering
Georgia Institute of Technology
April 1, 2007
This white paper is the result of work done by Jon Petersen as a
Research Scholar in the Industry Studies
Program of the Supply chain and Logistics Institute. Jon can be
contacted at [email protected] for any
comments or questions.
-
2
Preface
This document is intended to summarize the primary
characteristics of the air freight industry today. The words air
freight and air cargo are used interchangeably, which admittedly is
not accurate. Of course, air freight generally refers to larger
parcels, where cargo is typically defined as the sum of freight,
packages, and mail. There are three goals for in this document:
(1) To present a macro-overview of the state of the industry,
and how the model of tomorrow will differ from that of today
(2) To present a comprehensive summary of how each component
along the air cargo supply chain works
(3) To summarize the most prominent challenges faced by the
industry, and to suggest areas for future research
The industry continues to emerge and faces several challenges in
order to accommodate the acceleration in the volume of airfreight.
We conclude by suggesting the most critical areas to address these
issues.
-
3
Contents
I. Industry Facts
A. Volume . 4
B. Determinants of Air Cargo Volume ... 6 C. The Geography of
Freight Movement .... 8 D. Air Cargo Tomorrow . 10
II. How the Process Works
A. The Players Involved .. 13
B. Process Flow: An Overview ... 13 C. Case Study at Singapore
Changi Airport ...... 15
III. The Freight Forwarder
A. Classes of Forwarders .. 18
B. Market Facts ... 18 C. Case Study at BAX Global ...... 19
IV. The Carrier
A. Classes of Carriers ... 22
B. Major Carriers .... 23 C. Airports ...... 24
C.1 HACTL 25 C.2 Busiest Airports by Volume .. 25
D. Aircraft 28 D.1 Overview .. 28 D.2 Freighter Data
............. 28 D.3 The Air Freighter of Tomorrow .. 30 D.4
Containers 31
E. Fright Carrier Economics .... 32 E.1 Coordination
............ 32 E.2 Pricing .. 32 E.3 Air Cargo Revenue Management
.. 35
V. Security
A. Air Cargo Security Risks .. . 39
B. Known Shipper Programs ....... 40 C. Air Cargo Security
Technology .... 41
-
4
I. Industry Facts
Given the degree of globalization and the emergence of global
supply chains, the role of the air freight industry has become
increasing important to the global economy. Consequently, there
have been considerable changes in the industry as it continues to
evolve. The growth of international air freight has outpaced that
of global GDP by a factor of 2.5 since 1980.
Air freight traffic constitutes less than 2 percent of all
tonnage transported. However, it represents over one-third of the
aggregate value of all international trade. Virtually anything can
be shipped vis--vis air freight. Most of this tends to be
high-valued goods such as pharmaceuticals, machine tools, computers
and electronics, aircraft, auto parts, perishables, instruments,
and medical equipment. Most of this is considered just-in-time
components used for time-sensitive processing.
Estimates on the nominal size of the air cargo industry range
typically fluctuate around $50 billion.
A. Volume
According to the 2006-2007 Boeing World Air Cargo Forecast in
2005 there were 178,122 million tons of freight ton-kilometers
flown globally. The growth of air cargo globally has averaged a
5.1% annual growth rate since 1995 (see Figure 1). Not
surprisingly, the majority of this growth is attributable to growth
in Asian markets, particularly China. This growth rate is
anticipated to accelerate (see below). Recall cargo is defined to
be the sum of freight (scheduled and chartered), mail, and express
carriers (i.e. small packages typically handled by UPS, FedEx, and
DHL). Figure 2 shows the decomposition of freight by class among
cargo handled in the U.S. Freight continues to exhaust the majority
of all cargo averaging 61% of all cargo over this period, while it
has grown from 57% in 1995 to 64% in 2005. Recently, there has been
a slight downturn in the industry. In the first half of 2006, the
growth rate has been less than half relative to its ten year
average. Despite this, the long term outlook for the volume of air
cargo is to keep growing at an accelerated pace. According to
Boeing, the total volume of air cargo is anticipated to grow at an
average annual rate of 6.1% through 2025. Among this growth, Asia
is expected to lead the way.
Boeing is forecasting annual growth of all cargo in domestic
China go grow at 10.6% per year until 2025
Intra-Asian routes are anticipated to grow at 8.6% annually
Asian-North American routes are expected to grow 7.1% annually; and
Asian-
European at 6.9%. That leads to the natural question of what
influences air cargo?
-
5
Volume of Global Air Cargo
1995-2005
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
air-
ton
kilo
met
ers,
millio
ns
All Carriers
U.S. Carriers
Non-U.S. Carriers
source: Boeing 2006-2007 World Air Cargo Forecast
Figure 1
B. Determinants of Air Cargo Volume.
Here we examine three possible dynamics regarding on what drives
air cargo. Of course, deriving causation from correlation is often
spurious. So we only examine a statistical relationship. We
consider the relationship between the volume of air cargo an (a)
the global macroeconomy (b) the price level and (c) the price of
jet fuel. Figure 3 shows the relationship between World GDP1. With
the exception of the 2001 recession, there appears to be an
unambiguously positive relationship between the two, which is not
surprising.
1 normalized to current-year US $; Source: World Bank
-
6
Components of Air Cargo, U.S. Carriers
1995-2005
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
air-
ton
kilo
met
ers,
millio
ns
Freight
Mail
Express Carriers
source: Boeing 2006-2007 World Air Cargo Forecast
Figure 2
Cargo Volume and World GDP
1995-2005
100
120
140
160
180
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
ton
-kilo
met
ers,
billio
ns
25
29
33
37
41
45
trill
ion
s U
S $
global air cargo (left axis)
world GDP (right axis)
Figure 3
-
7
Figure 4 shows the relationship between the volume of air cargo,
the (normalized) price of jet fuel, and the (normalized) price of
air transportation2. One might expect a negative relationship
between the price levels and the volume of air cargo. However the
figure shows this is not necessarily the case. The relationship
between volume and each of the price indices shows the lack of an
unambiguous relationship. We therefore conclude that, at least in
the past decade, the growth of air cargo has been robust. That is,
the high growth of air cargo has developed in spite of
unprecedented shocks concerning jet fuel.
Growth in Cargo Volume versus Jet Fuel Prices
1995-2005
-40
-20
0
20
40
60
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
% c
han
ge f
rom
pre
vio
us
year
Cargo volume
Price of jet fuel
Price of air transportation
Figure 4
As a coarse approach to quantifying the relationship each of
these variables have on volume, let us look at a simple OLS
regression. We wish to fit the following model
ttttt PtransPfuelWGDPVol ++++= 3210
where t
Vol denotes the volume of cargo transported (ton-kilometers) in
year t, t
WGDP
denotes world GDP in year t, tPfuel denotes the change in the
price of jet fuel in year t
2 this is the producer price index of jet fuel; source: Bureau
of Economic Analysis
-
8
relative to year t-1, and t
Ptrans denotes the change in price of air transportation in year
t
over t-1. An OLS produces the following output:
7240.0
33.0 10.0 48.388.25
2
)18.0()75.2()58.0(
=
+++=
R
PtransPfuelWGDPVol ttttt
Where the OLS coefficients are reported and their corresponding
t-values are below. We note from this simple model that only world
GDP statistically captures air cargo volume, and as we would
expect, we have a positive coefficient of world GDP. The model
captures most of the variation as evidence by the goodness-of-fit
metric. By dropping jet fuel inflation and air transportation
prices, we have an improved reduced model:
7800.0
82.372.14
2
)04.6()69.0(
=
++=
R
WGDPVolttt
So we conclude by saying that world output statistically affects
volume of air cargo, at least from 1995-2005. Moreover, for every
trillion dollar increase in world GDP, we would expect the volume
of air cargo to increase by 3.82 billion ton-kilometers, cetris
paribus.
C. The Geography of Freight Movement
Here we address the movement of air freight with respect to
geography. Let us examine the anticipated freight volume growth
across regions. Freight within North America
56% of all air cargo is shipped with at least one endpoint in
the U.S. According to the Airforwarders Association, in 2001 31% of
total global freight activity was within the U.S.; 25% was
U.S.-abroad; and the remaining 44% was non-U.S. activity. Within
North America, lanes traversing the US-Canadian border experience a
surprising asymmetry with northbound freight volumes being more
than twice of southbound freight. Northbound freight typically
contains small packages, computers, and general industrial
machinery. Southbound freight contains mostly telecommunications
equipment, small packages, and electric machinery. North America
Asia
North American-Asian routes have boomed from the coupled effect
both globalization and strong domestic growth. Thanks to the two
the continued economic expansion of China, it is now the second
largest trading partner with the U.S. as it has overtaken Japan as
the largest Asian trading partner. 33% of all air freight movement
between the U.S. and Asia is with China whereas Japan accounts for
24%. The growth of air freight has been so pronounced, many major
Asian stations have either insufficient capacities or other
inadequate infrastructure to support the continued growth of cargo
activity.
-
9
Consequently, there has been a boom of infrastructure investment
to support the continued reliance of air freight between the two
regions. While the bulk of the growth has been on eastbound flights
originating in Asia, westbound flights have also been expanding
rapidly. From 1995-2005, Asian-North American routes have averaged
a robust 7.8% annual growth while North American-Asian routes have
only averaged a meager 2.6% annual growth. Their respective
forecasts up to 2025 are 7.1% and 7.2%. This growth is projected in
spite of exchange rate volatility which is widely believed to
influence the volume of cargo shipped. There is no predominant type
of cargo that is flown on eastbound flights. Boeing lists 59% of
all cargo on these lanes as other while 11% are documents and small
packages, 7% being electrical machinery, and 7% chemical materials.
Westbound flights are also quite diverse. Office machinery and
computes account for 16% of westbound cargo, 14% apparel, 14%
telecommunications equipment, and 11% electrical machinery. The
trade imbalance, however, has continued as eastbound flights carry
substantially more volume than westbound flights. This has created
problems for all players along the air freight chain, particularly
freight forwarders. Other coordination disturbances have resulted
which will be discussed in greater detail throughout this document.
Commerce between Europe and Asia also has experienced substantial
growth. From 1995-2005, westbound traffic has increased 12%
annually while eastbound has experienced 4%. As is expected with
North America, it is expected that growth over the next 20 years
will average to be around 7% per year. North America Latin
America
About 70% of all freight between North America and Latin America
is with South America, mostly from Columbia and Brazil. Growth
between these two regions has averaged 4.5% annually on northbound
lanes and 0.3% of southbound. From 2005-2025, Boeing anticipates an
average growth rate of 6.0% on flows into North America and 5.4% on
flows out of North America. Most northbound flights carry consumer
goods such as fish (23% of all northbound cargo), flowers (21%),
and fruits and vegetables (11%). Southbound traffic contains mostly
electronics goods lead by automated data processing machines (11%),
manufactured goods and special machinery (10%), electrical
machinery (7%), and industrial machinery and equipment (6%). Europe
North America
Eastbound traffic has experienced an average annual growth rate
of 2.5% since 1995, compared to westbound traffic which has been
growing at 3.8% annually. Both routes are anticipated to accelerate
with the expectation that eastbound and westbound traffic to grow
at 5.1% and 5.6%, respectively. Most of the trade activity with
Europe has been with Germany (21.4%), United Kingdom (19.6%),
France (11.5%), Italy (9.3%), and The Netherlands (8.3%). On both
routes, most cargo is considered to be documents and small
packages, machinery, and specialized equipment.
-
10
North America Middle East
Despite the economic and instability in the Middle East, the
region has been growing rapidly in terms of output. The United Arab
Emirates, Jordan, Qatar, and Kuwait have averaged annual growth
rates in excess of 6% from 2003-2005. This can be attributed mostly
to the continued expansion of oil exports. Not surprisingly, air
cargo activity has also been growing in the region and plays a role
of increasing importance. North American cargo activity with the
Middle East accounts for only 10% of all activity, but has been
growing at 6.9% per year from 1995-2005 (and 7.8% from 2001-2005).
Annual growth between the two regions from 2005-2025 is expected to
be 7.6%. Eastbound lanes into the Middle East mostly consist of
small packages, machinery, scientific equipment, and transportation
equipment. Shipments westbound into North America mostly consist of
apparel, fruits and vegetables, and pharmaceuticals. Figure 5
summarizes the average annual growth rates from 1995-2005 and the
projections from 2005-2025 according to Boeing among major cargo
lanes.
Cargo Volume: Historial and Future Expected Growth
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Intra-
U.S.
U.S. -
Canada
S.Am ->
N.Am
N.Am -
> S.Am
S.Am ->
Europe
Eur ->
S.Am
N.Am -
> Eur
Eur ->
N.Am
Intra-
Europe
Asia ->
N.Am
N.Am -
> Asia
Eur ->
Asia
Asia ->
Eur
Intra-
Asia
ann
ual
%
1995-2005
2005-2025 (proj)
Figure 5
D. Air Cargo Tomorrow
The fact that air cargo has grown in the presence of global
economic volatility is indicative of the robust state of the
industry. That said, there are a number of considerable challenges
that the industry faces that provide a number of research
opportunities. Among these:
-
11
1. Capacities Many stations are reporting insufficient
capacities to accompany the growth in the volume of air cargo. An
example is at LAX, where the airport is having to locate storage
facilities off-site to temporarily store cargo.
2. Security Concerns regarding the security of air cargo and
that of major cargo ports have been heightened post 9-11. However,
inspecting 100% of air cargo is unambiguously an infeasible
solution. Designing a security system allows for maximal inspection
and implementing the best technologies to secure cargo while
minimizing the distortion it induces on the efficiency is an open
problem of great importance.
3. Fuel prices According to the Bureau of Labor Statistics, the
price of jet fuel has increased by 250% from 2000-2005 alone. Many
believe the increased price level is structural, possibly
experiencing similar increases moving forward. Figure 6 shows
average annual price changes in jet fuel from 1975-2005.
4. Technology The industry is becoming increasingly competitive
and firms who adapt to the latest technologies are more likely to
succeed all else equal than firms implementing antiquated
technologies. Also, firms are increasingly relying on
collaboration, so synchronizing technologies is imperative so firms
are able to work together. As capacities become more limited, more
freight is shipped, and competition becomes more intense, the
demand to operate at the technological frontier is important to all
firms. The ability to advance the frontier outward is even more
important and always remains a challenge.
Change in the Price of Jet Fuel
1975-2005
-40
-20
0
20
40
60
80
1976 1980 1984 1988 1992 1996 2000 2004
% c
han
ge f
rom
pre
vio
us
year
Figure 6
-
12
II. How the Process Works
Here we seek to understand the simple question of how a given
piece of freight moves between its origin and destination. The
general overview of the process can be summarized in the following
figure:
Freight Forwarder
Shipper
Security
Freight Forwarder
Consignee
Storage Loading
Carrier
Pure freighter
Integrator
Combination Carrier
Ground Handling at Departure Airport
Ground
Handling at
Arriving Airport
Unloading Storage Final Destination?
Customs (if intl)
no
yes
-
13
A. The players involved
The following agents along the chain of air cargo are all
crucial to the efficacy of the air cargo process. Let us formally
define them. Shipper (or Consignor) the one who requests service in
transporting the cargo (source node of the supply chain) Freight
forwarder (or forwarder) analogous to a travel agent with
passengers; the forwarder typically arranges for the transportation
of cargo from the shippers warehouse, delivers (or has a contractor
deliver) it to the departing airport, prepares the necessary
paperwork, picks up at the arriving airport, and delivers (or
contracts for the delivery) to the consignee. Carrier The firm who
provides the air delivery of cargo from the origin airport to the
destination airport. There are primarily two classes of carriers:
cargo carriers that primarily carry cargo and freight (e.g. FedEx,
UPS, DHL, Kitty Hawk, Cargojet Airways), and combination carriers
that carry both passengers and cargo that is stored in the bellies
of aircraft (e.g. Korean Air, Lufthansa, Delta). About 25% of all
cargo is carried on commercial passenger planes with the remainder
on freighter aircraft. Ground Handler An agent at an airport that
physically handles the freight; this usually refers to whenever
freight is loaded, unloaded, transferred, stored, retrieved, broken
down, or consolidated. Consignee The receiving party that the goods
are sent to (sink node of the supply chain)
B. Process Flow: An Overview
Process flow of air cargo is subject to variability across
stations. However, most stations follow the following overview. We
will look at a case study in the subsequent section with a more
precise analysis in Singapore.
From the warehouse to the airport
While shippers may deliver their cargo directly to the airport,
the majority of cargo is handled through a freight forwarder. In
most instances, the forwarder will pick the freight up from the
shipper or the shippers warehouse. Unless the freight is rushed, it
is generally brought to the forwarders warehouse and consolidated
with freight to the same (initial) destination. Forwarders
generally have their warehouses close to airports as freight is
often transferred. The forwarder must also possess the air waybill
which is a contract between shipper and carrier for the carriage of
freight over the carriers routes.
-
14
Booking
Days before departure, the forwarder will book freight on a
given flight with a carrier. Most large forwarders receive a
pre-allocated space on routes on a daily basis, but still call the
carrier to specify the dimension and weight of the freight on a
given flight for planning purposes. Forwarders may or may not have
contracts with certain carriers. The booking process is becoming
increasingly automated as it allows for more efficient operations
and greater transparency. Generally the forwarder first reserves
space, then confirms and picks up the freight only after receiving
confirmation from the carrier. Consolidation
Once in the hand of the forwarder, the cargo is likely to be
consolidated with other shipments. The freight is likely to sit in
a warehouse of the forwarder and await cross-docking, depending
upon the priority of the goods. If the goods are not
time-sensitive, they generally are stored one to three days in the
forwarders warehouse to be consolidated before being delivered to
the airport. Upon arrival at departing airport At the airport, the
forwarder will deliver the freight to the carrier in which the
freight goes through security. This is a significant component of
the air cargo process and will be discussed in greater detail
below. The air waybill is delivered, in which the forwarder
possesses substantial penalty if there are discrepancies. The cargo
is usually temporarily stored in a warehouse facility at the
airport as it waits to be loaded. Usually, cargo is randomly
assigned to bins which induce fast storage but slow retrieval
(designing efficient storage mechanisms are of considerable
interest). The cargo is then retrieved prior to arrival and loaded
via a unit loading device (or ULD) and secured. The aircraft
departs when all cargo is secure. At the arriving airport
Cargo is flown either to the destination airport or an
intermediate airport where it likely gets re-consolidated,
re-containerized, and placed on another leg. Most likely, the cargo
is temporarily stored at a warehouse where it is either transferred
to a connecting flight or awaits to be picked up from the forwarder
and delivered to the consignee. If re-consolidation occurs, there
are a number of issues to classifying each piece of cargo. It can
be consolidated by: size and weight, special requirements (e.g.
refrigerated goods together, dry ice cannot move with live animals,
etc.), service level (by priority), or destination. Different
operators may consolidate differently. If a given leg is
international, then the cargo is subject to customs clearance which
is done at the airport. Delivery
From the airport, a forwarder typically will deliver the cargo
in the reversed order from where the forwarder delivered the cargo
to the airport.
-
15
The air cargo process is driven by the freight forwarder, the
carrier, and the process flow. Here we study each of these
principal components separately.
C. Process Flow: A Case Study at Singapore Changi Airport
Due to the aforementioned variability in the process flow across
stations, let us examine the precise flow at Singapore Changi
International Airport (SIN). SIN is one of the busiest cargo
airports by volume globally, and is the hub for Singapore Airlines,
one of the leaders in freight transportation. Singapore Airport
Terminal Services, Ltd (or SATS). is the official terminal operator
in Singapore, and one of the most reputable. SATS handles over 75%
of all of the air cargo flow in Singapore. Opened in 2001, SATS
Airfreight Terminal 6 is one of the most sophisticated global
airfreight facilities which required a $270 million investment.
Please note that information of the process and information flow at
SATS is from the Bazaraa, Hurley, et al. paper (2000). Shipper
Booking with Forwarder
The first obvious step in the process is for the shipper to
contact the forwarder (unless the carrier that will transport the
cargo is an integrator, these will be different entities). Orders
are placed either through faxes or phones. The forwarder then will
reserve space with the carrier, and only after the carrier confirms
space with the forwarder are arrangements made to pick up the
freight. If the forwarder has pre-allocated space from a contract
with a carrier, the confirmation is almost immediate. Otherwise,
the confirmation will take substantially longer. For international
shipments, the forwarder needs to apply through Tradenet for an
Export Cargo Clearance Permit, as well as other specialized permits
that depend on the cargo being shipped. In most cases, the permit
is approved within 30 minutes, but the forwarder is generally
allowed the obtain the permit within three days after the export.
Once booked, the forwarder will send an itinerary to the shipper,
and trucking is scheduled for pick up. The cargo is then picked up,
together with the necessary paperwork. Generally the forwarder will
make multiple pick ups before returning to the forwarders warehouse
where cargo is labeled and processed to the export department. Once
this is processed, it is officially measured and weighted for the
air waybill to be completed. The freight is stored, a pick list is
generated, and the cargo is loaded to be brought to the airport.
Check-in/Registration
Upon arrival to the airport, the forwarder clocks in the control
form and proceeds to the acceptance counter. There is an acceptance
officer on duty who first process all the documents upon accepting
the cargo. Weighing is then done and cross-checked with the
AWB.
-
16
As is with the case of most facilities, lose cargo induces
inefficiencies. Loose cargo needs to be consolidated or built up at
the facility which requires labor. Because there are approximately
250 forwarders in Singapore, none with excessive market power, lose
cargo tends constitute a greater share at SATS than at most other
facilities. Ground Handling to Departure
Meanwhile planners monitor activity for each future departing
flight and particularly monitoring arriving cargo that needs to be
transferred within a short time frame (generally two to six hours).
Planners have a list of the containers and a loading plan, as well
as a loading priority list that is to be loaded first. In the
presence of overbooked flight legs, planners will consult the
airline for route management issues.
For loose cargo For cargo accepted within four hours of
departure is moved to a build-up area and placed on a pallet or in
a container. Cargo accepted more than four hours prior to departure
is placed in a storage bin that will be placed into the Automated
Storage/Retrieval System (ASRS) once it is full with other freight.
The storage location is logged and later retrieved. Twelve hours
prior to departure, the export retrieval team will sort cargo into
bins according to flight number. About four hours before departure,
cargo is built up in a location where all cargo is built up. A
label or tag is then placed on the consolidated cargo and is
transferred vis--vis an elevating transfer vehicle (ETV) to the
pre-load area near the aircraft. This is done as early as two hours
before the departure time. The master loader typically begins
loading cargo from this area an hour prior to departure. As cargo
is moved toward the pre-loading area, the flight manifest is
updated until the completion of all built-up cargo for the flight
leg. This manifest is a master list of all cargo on the given leg
and contains the AWB numbers, weight, origin and destination, and a
description of a good.
For palletized/containerized cargo The process flow for cargo
not required to be built up is similar to that of loose cargo. The
only difference is that pallets or containers do not require
further consolidation, and are not brought to the general
consolidating area. If built-up freight is checked prior to four
hours, a label is immediately placed on the container and are
brought to the pre-loading area. Otherwise, they are stored in the
automated warehouse system and will be retrieved before
departure.
For specialized cargo For cargo requiring special needs, there
are specialized facilities located throughout the airport that such
cargo is brought to. Arrival to Ground Handling
Generally, the arrival process is just a reversal of the
departure process. Cargo is brought to the terminal warehouse
office and sorting begins. AWBs and other documentation are sorted
by accounts. Then they are placed in pre-specified pigeonholes
according to the
-
17
forwarder contracted to pick the cargo up if the arrival airport
is the destination. The consignee may be notified of the arrival if
requested. While the cargo is being unloaded, documents are
processed which are surprisingly time consuming. Cargo from
passenger aircraft takes approximately two hours to complete and
three hours on a freighter aircraft. Off-loading generally takes
place between 30 and 45 minutes after arrival and all cargo is then
verified. For cargo requiring transferal, it is sent to an export
station and it goes through essentially the same process as at the
arrival airport without the registration. Special cargo is brought
to the specialized facility. Ground Handling to Forwarder In most
cases, the forwarder will receive pre-notification of arrival.
Cargo is generally ready to be picked up two hours for passenger
aircraft and three hours for freighters. The forwarder collects the
air waybills and related documents, and a delivery order is
generated. Through TradeNet, import cargo clearance permits and
other various permits (depending on the contents of the cargo) are
applied for, and issued within 30 minutes. After clearance, the
warehouse department retrieves the cargo the transportation
department begins planning truck delivery routing. The cargo is
then given to the forwarder, in which the forwarder checks the
condition of the cargo and delivers it to its warehouse. It is then
either broken down or sent directly to the consignee.
-
18
III. The Freight Forwarder
The freight forwarder plays an integral role in the air cargo
process. While they essentially are responsible for coordinating
the movement of freight between the shipper and consignee, the
mechanics by which they operate and the environment under which
decisions are made is complex. We seek to describe this here.
A. Classes of Forwarders
Before proceeding, it is important for us to identify different
classes by which forwarders are characterized. Forwarders are
coarsely grouped into two types of firms: integrated and
disintegrated. Integrated forwarders play the role of both
forwarder and carrier; their firms operate at each stage of the air
freight process. That is, they pick up, transport, consolidate,
book, carry, and deliver freight. Disintegrated firms, however, do
not carry freight. At a minimum, disintegrated firms only
coordinate the movement of freight; they contract the delivery
process. However most forwarders provide the trucks (either
directly or through a contractor) and deliver to the departure
airport and pick up at the destination airport.
B. Market Facts
In 2004, the global freight forwarding industry amounted to
$27.63 billion. Not surprisingly, the freight forwarding industry
has grown with the air freight industry. An interesting observation
is to note that there has been more market concentration in the
industry. Deutsche Post alone, the German postal service, alone has
made over 100 acquisitions since 2003 alone including all of DHL,
25% of Lufthansa Cargo, Air Express International, Airborne Inc.,
and SmartMail. Among the major acquisitions recently, in 2005,
Deutsche Post acquired Exel for $6.6 billion. The next year,
Deutsche Bahn acquired BAX Global for $1.2 billion. The most common
explanation for this increase in concentration is the fact that the
high growth in cargo drew more forwarders into the industry at
first. Many of the firms that got bought out were nitsche
providers. In general, coordination among firms abates double
marginalization and such a mechanism cannot be sustainable in an
industry as competitive as the freight forwarding industry when
margins are low to begin with. Federal Express (FedEx), United
Parcel Service (UPS), and DHL account for the three largest
forwarders, often collectively referred to as the Big Three. These
are all integrated forwarders, but are somewhat different from a
traditional freight forwarder in the sense that the majority of
their volume accounts for small packages which do not account as
freight. Each of these firms has separate divisions distinguishing
documents and small packages apart from pure freight.
-
19
Table 1 shows some data of these three giant firms, as well as
the size of their air and ground fleets.
Table 1
Summary of FedEx, DHL, and UPS (2006 data)
% of total revenue FedEx DHL UPS
Air freight 10.96% 6.56% 1.88%
Forwarding services/logistics (includes small packages)
11.75% 20.33% 11.13%
Aircraft 671 420 268
Freight Vehicles 42,000 76,200 91,700
Besides the so-called Big Three, other dominant freight
forwarders include Nippon Express, Kuhne & Nagel, BAX Global,
Schenker, Kintetsu, and Panalpina. These firms, along with FedEx,
DHL, and UPS accounted for about 70% of the total global air
freight forwarding in 20043.
C. Case Study: BAX Global
To illustrate how a typical freight forwarder operates, let us
study one of the major global freight forwarders, BAX Global. About
BAX Global
Founded in 1972 as Burlington Northern Air Freight World
Headquarters: Irvine, California $.29 billion in revenue in FY 2005
(77% is from international transport or
logistics service) Currently operates about 500 facilities in
over 130 countries In January 2006, Deutsche Bahn acquired BAX
Global; the value of the company
increased from $3 billion to $12 billion. Services Provided In
addition to air forwarding, BAX Global provides the following
services:
Ocean freight forwarding Trucking services Consulting Value
Added service Warehousing
3 Source: 2005 Deutsche Post Annual Report
-
20
Given the recent increases in the price of air freight
transportation, ocean freight has become relatively less expensive
for the forwarder (and hence, the shipper). Consequently, many
forwarders are focusing on growing their ocean forwarding services
as it has traditionally not been as well developed as air freight
forwarding. The fact that firms face increasing demand for ocean
forwarding helps explain the increased market concentration. As
mentioned, in January 2006 Deutsche Bahn (the German logistics
provider who also owns DHL) acquired BAX Global from The Brinks
Company (the former parent company of BAX Global) partly to
harmonize their global logistics profile. More specifically,
Deutsche Bahn acquired Schenker Logistics who has been a dominant
ocean forwarder. The further acquisition of BAX Global is likely a
result of this change in the composition of forwarding services.
Logistics at BAX Global
Domestic freight is either shipped by truck or plane, depending
on the priority of service requested by the shipper. The truck
fleet is operated by a number of trucking firms who are contracted
(e.g. Schneider, ATi, USPS, UPS, among others), some of whom are
required to display the BAX logo on their trucks. There is a
network consisting of six Gateways and six consolidation hubs. With
respect to air freight, there is a single hub in Toledo, Ohio. The
fleet consists of 21 DC-8s (which, as of December 2006, constitutes
as the largest operator of DC-8s), with about three aircraft being
in maintenance at any given time. Freight also may be transported
by commercial air carriers who BAX contracts with. While BAX owns
its own fleet, they fly only domestically. Thus, they are most
aptly characterized as an integrated fleet with respect to domestic
cargo and a disintegrated fleet with respect to international
freight. The fact that there is a considerable imbalance between
outgoing and inbound freight poses challenges between the
coordination of them and their contract carriers (see section 1 for
a description of this imbalance; this is particularly pronounced on
Asian-North American routes). Because of this imbalance, freight
forwarders exhibit bargaining power with carriers on North America
to Asia lanes, whereas the carrier will exhibit such power on Asia
to North America lanes. To hedge this imbalance, BAX Global
guarantees its shippers that for every container that is outbound
to Asia, they will accommodate four containers inbound from Asia.
Supply Chain Coordination
Collaboration between freight forwarders and other global supply
chain participants is critical to the success of firms. Prior to
2003, BAX operated mostly independent from their competitors in
their trucking network. At the beginning of that year, on most
lanes they made their trucks available to other forwarders to
enable them to (a) expand their existing network and (b) improve
upon load factors to their trucking fleet.
-
21
Coordination between participants along a supply chain becomes
increasingly important given that margins remain to be low for the
forwarders. Contract design in the freight forwarding industry (as
well as that for the air cargo industry) remains a topic of
interest that is not well developed. This topic is considered one
of the more open questions.
-
22
IV. The Carrier
Clearly in order to study airfreight, one must study the
carriers. We begin by listing the major carriers, and characterize
the major firms. Then we study how cargo operations differ among
the major firms. We also study airports and how capacity
constraints and major facilities may influence the future of the
air carrier.
A. Types of Carriers
Air carriers can principally be decomposed into three classes:
freight carriers, combination carriers, and integrators. Freight
carriers are devoted solely to freight, while the combination
carriers include airlines or subsidiaries of large air carriers who
carry passengers while storing freight in the belly of aircraft.
Integrators oversee the entire process and act as the forward and
the carrier. Examples of freight carriers include Cargojet, Kitty
Hawk, Gemini Air Cargo, Polar Air Cargo, among many others. Some
airlines have subsidiaries that act as a freight carrier, but are
likely to be considered a combination carrier, like Lufthansa
Cargo, a subsidiary of Lufthansa Airlines that carries only cargo,
while Lufthansa Airlines is clearly a passenger airplane.
Combination carriers are generally passenger aircraft that
additionally carry cargo aside. Cargo used to be a byproduct of
passenger airlines, but has grown in the importance of most firms
operations. However the size and importance of cargo operations
greatly differs across firms (see below). So Lufthansa also is
likely to carry freight in any given flight in an A-320 which makes
Lufthansa Airlines a combination carrier. However their subsidiary
Lufthansa Cargo is a freight carrier. In the U.S., Northwest
Airlines (as of 2006) was the only U.S. airline that operated
freighters. The primary integrators are the big three: FedEx, DHL,
and UPS. A number of estimates show that with regards to all air
freight flown by combination carriers, roughly 75% is still flown
on freighter aircraft while the remaining 25% is integrated with
passenger planes. It is interesting to note that in their annual
reports, the big three have indicated a movement away from small
packages and documents to larger freight. This could have a
profound impact on the industry as these giants exhaust a greater
share of large cargo transported. Another noteworthy trend is the
development of so-called niche providers. While there is
considerable market concentration in the airfreight industry, the
number of firms has still been increasing. One explanation for this
observation is the increase in the number of carriers who
specialize in specific types or classes of freight transportation.
Many of these are typically smaller firms who are contracted to fly
for larger carriers. So while the
-
23
number of carriers has been increasing, the aforementioned major
carriers have been transporting a greater share of all freight
transported. Examples of niche providers include those firms that
specialize in the transportation of: produce, garments, live
animals, wine, forestry products, IT equipment, medical supplies,
frozen/refrigerated goods, among other specialized freight.
B. Major Carriers
Table 2 lists the largest carriers of air freight overall in
2004. Please note that for combination carriers, the FTK data
represents the sum of freight flown in passenger aircraft and
freight flown by their subsidiaries. Table 3 shows some data on
load factors, and Table 4 shows a sample of larger passenger
carriers and the share of profit from cargo.
Table 2
Freight-Tonne Kilometers (FTKs) Flown, 20044
rank Carrier Millions FTKs
1 FedEx 15.58
2 Korean Air 8.26
3 Lufthansa Cargo 8.04
4 UPS 7.35
5 Singapore Airlines 7.14
6 Cathay Pacific 5.88
7 China Airlines 5.64
8 Eva Airways 5.48
9 Air France 5.39
10 Japan Airlines 4.92
Table 3
Sample of Load Factors at Major Carriers5
Carrier Load factor
Korean Air 76%
China Airlines 73%
Lufthansa Airlines 65%
Singapore Airlines 64%
4 Source: International Air Transport Association 5 Source: each
carriers annual report (2005)
-
24
Table 4
Sample of Cargo Share of Revenue at Major Combination
Carriers6
Carrier Cargo Revenue, as % of Total Revenue
China Airlines 43.54%
Korean Air 32.28%
Singapore Airlines 31.49%
Cathay Pacific 28.50%
Continental Airlines 8.66%
United Airlines 4.30%
Table 4 verifies that the share of cargo at major combination
carriers is subject to considerable variation. A natural question
to ask is what a break-even load factor must be. While data is not
readily available, according to their annual reports, China
Airlines and Singapore Airlines reported break-even load factors of
72% and 63%, respectively.
C. Airports
It is naturally of interest to study airports as they have a
great impact on the efficacy of the air cargo process. A natural
place to place to begin is identifying the major airports utilized
in airfreight. Table 5 exhibits the 20 busiest stations of air
cargo handled by volume in 2005. A great concern is that whether
airports, particularly the ones listed in Table 5, have sufficient
capacity to accommodate the expected growth in air freight even in
the short term. An example is at LAX which serves as an important
gateway to and from Asia. The facility is so capacity constrained
that other nearby facilities are being utilized more. For example,
John Wayne Airport, Ontario, and Long Beach are airports that are
being increasingly utilized as a result. According to the Ontario
airport authorities the owner and manager of both (LAX and ONT) is
counting on ONT to assume tremendous cargo growth as LAX confronts
critical capacity limitations7. This problem reiterates the
importance of planning considering that the volume is not expected
to be constant, but it is anticipated to grow at 6.1% per year from
2005-2025 (according to Boeing). One area that has grown that has
been able to increase throughput at some facilities has been the
implementation of automated retrieval systems. Further work in
picking, storing, and cross-docking is important to increase
efficiency and therefore the ability for facilities to accommodate
the future anticipated growth. This is an important challenge for
airports, particularly consolidation hubs, and will be discussed in
greater detail below.
6 Source: each carriers annual report (2005) 7 Source:
www.ci.ontario.ca.us/index.cfm/2559/3817
-
25
C.1 HACTL
One of the most important facilities in the air cargo world is
Hong Kong. It is also one of the most efficient. Hong Kong Air
Cargo Terminals Ltd, or HACTL, is largely considered a model for
how a cargo facility should operate. It is unambiguously considered
the most technologically advanced facility. Because it is such a
major player in global air cargo, let us look at some basic facts
before looking at why it is considered a model facility.
The SuperTerminal 1 at HACTL is the worlds largest stand-alone
air cargo handling facility.
Opened in 1976, SuperTerminal 1 recently opened after an
investment of more than $1 billion.
It has an annual capacity for 2.6 million tonnes of capacity.
The land area for SuperTermianal 1 alone is an astounding 170,000
square
meters. The reason why HACTL is largely considered the model
facility can be most succinctly characterized in one word:
automation. Lets look at some of these components8.
The container storage system, for example, is fully automated
with more than 3,500 storage positions. There are 12
computer-controlled stacker cranes for moving cargo efficiently
within the network.
The box storage system (BSS) contains more than 10,000 bulk
storage positions for individual consignments. Goods move in and
out of BSS with no human intervention.
Even cargo unit and pallet handling are also highly automated.
Units and pallets go directly from the tarmac into the storage
system which has more than 3.500 storage positions.
The top floor of the six-story facility is dedicated to breaking
down and building up freight according to a computer-generated plan
in one of over 300 individual workstations. This is done in a
tightly-restricted highly secure area. Containers move throughout
the facility by a highly sophisticated level of conveyor loops and
computer-controlled cranes.
The security system is also considered the most advanced. It has
consistently had the lowest rate of pilfering among major
ports.
While many successful cargo facilities have implemented
information technology that lies near the frontier of available
technologies, HACTL is still considered a model for major hub
facilities, and it ought to be emphasized when studying the air
cargo industry.
C.2 Busiest Airports by Volume
Table 5 shows the 20 busiest cargo airports globally (2005
data). 8 of the 20 are U.S. facilities, 7 are Asian facilities (3
of which are in China), 4 are in Europe, and 1 in the Middle East
(Dubai).
8 Source: HACTLs website at www.hactl.com
-
26
Figure 7: Container storage systems at HACTL
Figure 8: Bulk cargo distribution system at HACTL (sushi-style
loop conveyor system
-
27
Table 5
Busiest Cargo Airports (2005)9
rank Station Metric tonnes handled
1 Memphis International (MEM)
Memphis, Tennessee 3,598,500
2 Hong Kong International (HKG)
Hong Kong, China 3,433,349
3 Ted Stevens Anchorage International (ANC)
Anchorage, Alaska 2,553,937
4 Narita International (NRT)
Narita, Japan 2,291,073
5 Incheon International (ICN)
Seoul, South Korea 2,150,140
6 Charles DeGaulle International (CDG)
Paris, France 2,010,361
7 Frankfurt International (FRA)
Frankfurt, Germany 1,962,927
8 Los Angeles International (LAX)
Los Angeles, California 1,938,430
9 Pudong International (PVG)
Shanghai, China 1,856,655
10 Singapore Changi (SIN)
Changi, Singapore 1,854,610
11 Louisville International (SDF)
Louisville, Kentucky 1,815,155
12 Miami International (MIA)
Miami, Florida 1,754,633
13 Taiwan Taoyuan International (TPE)
Taoyuan, Taiwan 1,705,318
14 John F. Kennedy International (JFK)
New York, New York 1,660,717
15 OHare International (ORD)
Chicago, Illinois 1,546,153
16 Amsterdam Schipol International (AMS)
Amsterdam, The Netherlands 1,495,919
17 London Heathrow International (LHR)
London, England 1,389,589
18 Dubai International (DXB)
Dubai, United Arab Emirates 1,314,906
19 Bangkok International (BKK)
Bangkok, Thailand 1,140,836
20 Indianapolis International (IND)
Indianapolis, Indiana 985,457
9 Source: International Air Transportation Association
-
28
D. Aircraft
Here we examine aircraft used my major freighters. For
combination carriers, freight is stored in the belly of the
aircraft so aircraft utilized on these routes are of little
interest. Therefore we restrict our attention towards freighter
aircraft.
D.1. Overview
Many smaller freighters operate retired aircraft. For example,
in 2006 BAX Global was the worlds largest operator flying 21 DC-8
aircraft. Kitty Hawk Aircargo is one of the larger operators of the
antiquated Boeing 727 fleet while operating 28 such aircraft (26 of
which are pure freighters; the other two are Boeing 727-200; they
also operate 7 Boeing 737-freighters). Yet most of the firms that
operate retired commercial aircraft or old freighter aircraft
constitute a relatively small share relative to their larger
counterparts. Let us examine some of the aircraft statistics of
freighter aircraft operated by these large entities.
D.2. Freighter Data
Overall, Boeing leads the freighter industry overall. According
to Boeing, their aircraft provide over 90% of the of the total
worldwide dedicated freighter capacity10. Boeing 747-F
Boeing 747 freighters exhaust two-thirds of the worlds wide-body
freighter fleet11. Further, it is estimated that half of all global
airfreight is carried in a B747-F. Most the larger carriers operate
a B747-F in their fleet, particularly for trans-continental routes.
Payload capacity is in excess of 124 tons (113,000 kg) and the
standard range is 4,450 nautical miles (extended range versions can
travel an additional 525 nautical miles). Maximum takeoff weight is
910,000 pounds.
Figure 9 (source: cargo.koreanair.com)
10
http://www.boeing.com/commercial/777family/pf/pf_freighterback.html
-
29
Boeing 777-F
Launched in May 2005 the Boeing 777-F was introduced
specifically for long-hauls with a maximum range of 4,885 nautical
miles (9,047 km). The twin-engine aircraft was marketed as inducing
the lowest unit operating cost. Payload is slightly less than the
747-F at 114.5 tons (103.9 metric tones). Boeing insists that this
particular aircraft will induce the lowest unit operating costs as
a result of the increased range. Boeing 767-F
While older than the B-777 F, the 767-F remains the worlds
second most popular freighter aircraft which is primarily used a
medium-size aircraft. It is marketed as being robust and fuel
efficient. Over 40 airlines own a B-767 and is crew-compatible with
the B-757 freighter. There is a two-person flight deck and its
twin-high-bypass ratio is said to provide efficient fuel economy.
Unlike the B-747 and B-777, it is not primarily used as a long haul
freighter with a range of 3,270 nautical miles (6,056 km). Payload
capacity is approximately 60.5 tons (54.88 tonnes). The aircraft is
good for bulk loading as it will hold virtually all types of
containers. The only real competitor to the Boeing family is the
Airbus freighters which are a distant second in terms of share of
global air freight. However, many industry analysts believe that
the introduction of the Airbus 380 could increase Airbus share of
the freighter market. However, in early 2007 Airbus announced that
it would delay the production of its 380F version. This could have
a more global impact. UPS was scheduled to purchase several A-380 F
models, but has canceled several of these in March 2007 as Airbus
has reported that it would be shifting several of their production
staff to the development of the A-380 passenger model. Despite
Airbus relatively small market share in the global airfreight
market, there are still a number of aircraft that transport a
substantial volume of freight, most notably from FedEx, DHL, and
Lufthansa Cargo. Airbus 300-F (A300-600 F)
The A300-F is designed primarily on shorter routes with a range
of 2,650 nautical miles (4,850 km) and bulk holding area of 298
cubic feet. The double side-by-side loading area allows for a
capacity of 21 pallets, while the single row loading design allows
for 15 pallets.
-
30
Figure 10 (source: cargo.koreanair.com)
Oversized Freight: Beluga (Airbus)
Designed to carry oversized cargo like airplanes, helicopters,
and other aircraft, as well as other abnormal sized cargo, Airbus
designed the A300-600ST as a wide-bodied version of the A300-600F.
With a length of 184 feet, span of 147 feet, and empty weight of 86
tons, the A300-600ST, or Beluga as it is commonly known (see Figure
11 for an evident explanation as to why it is frequently called
this) is one of the largest and most innovative of aircraft
designs. The Beluga has a cargo volume of 848 ft3 (or 1,365 m3),
cargo capacity of 47 tons, and requires a cockpit crew of four to
operate. The aircraft replaced previous so-called Super
Transporters (hence the ST in the aircraft model) including the
Super Guppies that began in operation in the early 1970s.
Figure 11: Airbus A300-600ST or Beluga
D.3 The Air Freighter of Tomorrow
Noise restrictions are also sensitive to the industry
considering the bulk of trans-continental activity is conducted
around midnight where there are more restrictions.
-
31
Another issue that is heavily pursued is sustainability and
implementing policies that minimize unnecessary emissions. This is
currently of interest to many that study the industry. Among the
more notable studies that has been active in the community is a
so-called continuous descent approach whereby aircraft climb to a
given ascendancy point quicker and descend in a more gradual,
continuous, manner instead of a more rapid descent. The advantages
to a continuous descent approach include:
Increased cost effectiveness Emission reduction Noise
reduction
There was a trial at Louisville International Airport (SDF)
which serves as the main hub for UPS in 2004. Although the approach
is subject to variation in pilot ability, wind speed, and aircraft
weight, the conclusion validated the preceding three advantages. CO
emissions below 3,000 feet were reduced by about 15% (depending on
the aircraft); HC below were reduced by about 18%; and NO2
emissions below 3,000 feet were reduced by 34%. Further, the fuel
burned to fly the last 180 nautical miles to the runway was reduced
by 364 and 118 pounds per flight on a B-767F and B-757,
respectively. The time it took to fly the last 180 nautical miles
also declined by about two minutes12. Studying continuous descent
approaches are one of many mechanisms that are being studied to
improve both cost and environmental considerations. It has gained
traction among those who study the industry, and is possible to
become increasingly a focus point moving forward.
D.4 Containers
As the shape and size of freight is subject to variation, there
are also many different containers to accommodate different classes
of freight. The most common types of containers will be owned by
all airlines. Most bulk freight comes in either a closed container
or is shipped on an open pallet. Containers are also tailored for
specialized freight. For instance, there are refrigerated
containers, horse stalls, and other specialized containers.
The most commonly used unit load devices (or Olds) are the
following: LD3
The LD3 container is the most common general closed containers
(see Figure 8). The volume of the LD3 is 153 ft3 (or 4.3 m3). The
larger freighter aircrafts generally have a capacity for at least
30 such LD3 containers. A Boeing 777 has capacity for 30 LD3s; An
A340-300 has capacity for 32 LD3s, and an A380-800 has a capacity
for 38 LD3s. There is also a refrigerated version of the LD3 for
produce and freight requiring temperature control.
12 note: noise was reported to be greatly reduced but was not
quantified due to unexpected wind changes
-
32
Figure 12: LD3 Container
Pallets
Pallets are just rectangular bases that support open faced cargo
that is secured. Pallet sizes differ; the most commonly used
pallets are of (approximate) dimension 7x10x8 that have a maximum
tear weight of 275 pounds (125 kg). The other is of dimension
7x10x5.5 with the same max tear weight (see Figure 9).
Figure 13: Pallet
E. Freight Carrier Economics
The freight carrier industry is becoming increasingly
competitive, and therefore a highly complex environment. Here we
study some aggregate industry-wide facts of the industry, examine
market concentration, how some planning decisions are made, and how
carriers coordinate. We conclude by a case study of air cargo
revenue management implemented at KLM.
E.1 Coordination
Given the number of players and the multiple stages of the air
cargo supply chain, coordination becomes an important means of a
carriers strategy. Also, we will see that the industry has become
increasingly concentrated. We begin by first studying where
carriers coordinate with other firms. I focus primarily on the
coordination between the carrier and the forwarder as these two
players do most of the handling on a given shipment.
Carrier-Forwarder Coordination
-
33
Recall the case study of BAX Global. While BAX has a fleet that
flies within North America only, they contract with certain
carriers on transcontinental routes. Such collaborations are
favorable as they abate the asymmetries between certain routes. We
have seen that on trans-Pacific routes, forwarders exhibit market
power on flights to Asia while the carriers have market power on
flights that originate in Asia. Another critical point in
carrier-forwarder coordination is risk sharing. Technologies are
making it increasingly possible for the coordination to improve.
Tracking technologies are centered at RFID that has allowed
customers, carriers, and forwarders to coordinate together.
Considerable resources have been, and continue to be allocated
toward improving this further so as to make cargo technology as
transparent as possible. One considerable barrier the industry
faces is integrating the technologies of different firms. Since
Deutsche Bahn acquired them, BAX Global expressed a great challenge
of integrating their IT systems with that of their partners and has
expressed how the frictions between incompatible systems have not
allowed full collaboration to take place. Forwarder-Forwarder
Coordination
While shippers use forwarders as an intermediary in the delivery
of freight, the forwarder contracted by the shipper may not be the
only firm that is used in ground transportation. Shippers often
collaborate with other shippers for two reasons. The first is
asymmetry in forwarders network. If at a given receiving
destination the carrier contracted by the shipper has little
presence, the forwarder will generally have the service provided by
a different firm who collaborates with the forwarder. For instance,
BAX Global has a fleet of trucks with the BAX logo on, but are
neither owned nor operated by BAX. They also contract with UPS,
FedEx, USPS, among other forwarders. The second reason for
establishing coordination with other forwarders is to improve load
factors. Naturally spoilage (excess capacity in this context)
occurs more frequently when a firm operates in isolation than when
they are able to transport some cargo for other firms. An example
comes from the trucking industry. Many of those familiar with the
industry cite the asymmetry involving truck loads in and out of
Florida; freight flowing into Florida outweighs that of flowing out
of Florida, and given the geographic isolation from Florida,
hedging this asymmetry becomes an important policy for many
trucking firms. Carrier-Carrier Coordination
Some carriers will coordinate with each other, motivated by the
same principle by which forwarders coordinate, namely risk sharing.
DHL, for example, coordinates with several other non-integrators to
carry some cargo on specific routes. FedEx and UPS, however, carry
almost all their freight on their own fleets.
E.2 Pricing
Another question that naturally arises is how pricing is
determined. Unfortunately there is not a precise answer to this
complex question. What we do know, however, is that pricing
-
34
is usually state-dependent as we expect any firm that uses
revenue management to exhibit. In the case of the freight
forwarder, pricing is based according to volume, priority, service,
and other characteristics. As we would expect, consolidated
shipments are charged separately in which the shippers freight is
consolidated (generally at the shippers warehouse) and are charged
a lesser price. Non-consolidated (LTL) shipments are considerably
more expensive. With respect to the pricing of the carrier, we will
study the complicated issue of revenue management below. Forwarders
either book freight for individual flights, or have contracts with
carriers in which the carrier reserves the given allocation on each
flight with the forwarder. For flights in which the forwarder book
separately, prices are subject to volatility. Of course the price
depends upon the capacity (and forecasted capacity), dimensionality
of the freight, and other factors. It may be of interest to learn
about the aggregate behavior of price indices. Figure 14 shows the
price indices for inbound versus outbound freight in the U.S. from
1992-2006. We note two salient observations: first, the price of
airfreight is subject to volatility. Secondly, which should not be
surprising considering the behavior of the volume of air freight,
that the price of both inbound and outbound freight have risen
considerably since 2002 (recall that 2001 was a recessionary year).
Moreover, the price changes for inbound and outbound freight appear
to have grown at the roughly the same pace.
Price Indices for International Freight
1992-2006
80
90
100
110
120
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
2005 2006
ind
ex
outbound flights
inbound flights
Figure 14
-
35
In the past, pricing would be generally static there would be a
fixed charge for a given service that would rarely adjust. However
technological advancements have made pricing more dynamic in the
air freight industry. With market segmentation, pricing is an
extremely complicated and highly-dimensional problem. This problem
is of extreme importance and needs to be studied in greater detail.
We now turn our attention to this problem of revenue
management.
E.3. Air Cargo Revenue Management
In the passenger airline industry, revenue management became an
extremely useful and important tool used by airlines in the 1990s.
The idea is to charge the right price to the right person at the
right time so as to maximize revenue. Passenger revenue management
is highly dimensional as time of booking, type of passenger (e.g.
business versus leisure passenger), origin-destination pair; among
other factors is a function of the price of the ticket when issued.
Despite this complexity, advancements in computational technology
have made these previously unsolvable problems tractable and have
become a vital component to any carrier. Revenue management is also
used with cargo carriers, and the idea is nearly identical to that
of passengers. As with passengers, cargo space is allotted in
advance or sold for free-sale. Both strategies use an iterative
schedule planning process: first a central planner schedules a
draft that is later evaluated in the second phase where it is
modified if needed. Both are driven by demand driven dispatch the
type of aircraft is subject to change as a function of demand.
Despite these similarities there are also considerable differences,
and the problem of revenue management of air cargo is even more
complex regarding passengers. The following distinguish these
complications:
Unlike passengers, cargo can easily be off-loaded subject to
on-time delivery. Consequently, the number of possible ways to
route a given shipments exceed that to route a passenger.
In passenger revenue management, each entity is well-defined: a
passenger. In cargo revenue management, each item is more complex:
length, width, and weight now define each entity.
Many bookings in air cargo are cancelled, re-booked, and
cancelled again. Therefore, the booking process is subject to
considerable volatility.
Demand is lumpy and forecasting future demand is thought of as
being at least as complicated as passengers.
Despite the difficulty in analyzing revenue management in air
cargo, the potential benefit is far too ignoring the complexity in
studying this. There has recently been some work done in the field
that has suggested various policies so as to improve revenue
management. Before looking at these, let us first decide the
challenges in modeling. The first is how to abate the curse of
dimensionality. Even with modern technology, solving such highly
dimensional problems is infeasible and obvious assumptions and
simplifications are inevitable. Another is whether the carrier is
assumed to be a combination carrier or a pure freighter. Different
booking policies and pricing strategies would be employed under
each scenario. Overage costs are vital to cargo because rebooking
is a more viable option in cargo as oppose to passenger (i.e.
overbookings
-
36
would naturally be far greater in the cargo framework as a
result). Spoilage costs are also critical to designing policies of
a carrier. It has been shown (see below) that that the
overage/spoilage costs are essential in governing revenue
management policies of a carrier. Another complication is modeling
show up rates. Due to the high fluctuations in booking and
rebookings (mostly by the freight forwarder) the show up rate is
volatile and also seen to be essential in appropriately modeling
air cargo revenue management. The differences in revenue management
between passenger traffic and air cargo is so vast that there have
been papers published just to enumerate these. As with the case of
treating passengers as entities, there are principle models that
capture the decision process of booking cargo: Markov decision
process (MDP), bid price accept/reject decision, and dynamic
stochastic knapsack problem. The last of these is not as common in
the passenger model as entities are well defined. There are clear
advantages and disadvantages to each of these. Most of the papers
listed below in a brief survey share the same characteristic in the
sense that cargo is often offloaded, re-routed, and is subject to
many changes given the low relative cost of overage relative to the
high cost of spoilage (of course this is not the case in
high-priority freight, but the routings of these are more
exogenous). Even by making generous assumptions regarding ways to
abate the dimensionality problem, the resulting problem is still
hard to find. Therefore, the next question is how to apply a good
heuristic to find a good, if not optimal, solution. Amaruchkul,
Cooper, and Gupta (2005) simulate seven heuristics by looking at
capacity-to-demand ratios with respect to both weight and volume.
Appropriate bounds are easily found and deviations of the outcomes
with respect to each policys upper bounds are compared. The best
heuristic depends centrally on the capacity-demand ratio. Not
surprisingly, a higher penalty cost induces a more conservative
booking policy in a simple accept/reject framework. Perhaps most
notably, the authors show that airlines can boost revenue
substantially by reducing uncertainty of their volume. This is
somewhat surprising considering the aforementioned fact that
overbooking is seen less costly in air cargo. However, the authors
result suggests that airlines may overbook too much in which the
tradeoff of higher volume of shipments is more than offset by the
reduced reliability of the carrier. Therefore, it may be of a
shippers interest to implement policies so as to reduce the
volatility of volumes. For instance, they may wish to introduce a
more standard shipping size.
Case Study: Revenue Management at KLM
While air cargo has made some advances in the academic
literature, implementation is a concern in which the recommended
policies are not necessarily tangible. The way airlines use revenue
management and the way the literature argues they should do not
necessarily coincide. Fortunately this issue has been documented in
a paper by Slager and Kapteijins (2004) in looking at a case study
of revenue management at KLM.
-
37
Forecasting cargo is much more difficult than passengers because
of the lumpiness of demand as well as the erratic behavior of the
cargo booking process. Moreover, KLM is a combination carrier so
balancing passenger and cargo bookings is a challenge and
complicates revenue management. Air cargo revenue management at KLM
is not as new as some may believe. In the mid-1990s KLM Cargo
initiated a program called System Profit Management, or SPM.
However, the program ultimately failed because it had focused too
much on IT and a scientific approach, instead of the numerous
complexities of the day-to-day process. (Slager and Kapteigns, pp.
82). In 2001, revenue management was brought back into what they
coined as margin management (MM) which sought to implement the
conceptual gains made from SPM. The goal of MM was to optimize the
margin of cargo by (a) increasing revenues (b) decreasing the
network costs for handling and (c) enhancing load factors in both
volume and weight. To continue the implementation of MM, two
organizations existed: MM Execution which was responsible for the
day-to-day execution of MM process in each of the three areas and
MM Process, and MM Process & Tool Development which was
responsible for the development of systems in which each of the key
players in their major markets could access. Margin management
continues to prosper at KLM Cargo today. As with most carriers,
cargo is sold one of two ways:
1. Contract Here there is a mutual agreement between KLM Cargo
and their customers (i.e. forwarders) in which the customer is
guaranteed a certain capacity on a given flight leg.
2. Free Sale Also called Request/Reply or R/R bookings Here
space is sold prior to departure with no guarantee on capacity. R/R
can be sold at either: list prices that are published in advance,
customer specific prices, or order specific prices.
The revenue management of each of the two cargo products
differs. Let us examine each.
MM on contracts Twice per year, at the start of the IATA summer
and winter schedule, new requests for contracted capacity is
submitted by the worldwide sales organization. Customers request
capacity per flight/weekday. KLM determines for each flight/weekday
how much of their total forecasted flight capacity may be sold on a
contracted basis (on all flights to and from Amsterdam). Requests
are then ranked per flight/weekday in descending orders beginning
with the highest margin per cubic meter or per kilogram. Then final
contracts are signed (KLM may take some lower margins over higher
margins under certain considerations from their customers,
particularly if their historical performance is reliable). Contract
requests may also be submitted during the season, and go through a
similar process. MM on R/R On all flights to and from Amsterdam,
route managers set and adjust shipment entry conditions (or SECs)
daily. Given a daily SEC, minimum margin requirements are
-
38
defined. The SEC can be set either per cubic meter or per
kilometer, depending if the flight is volume or payload
constrained. Daily forecasts for SECs are made depending upon
historic booking profiles, current capacity, current booking
profile, market knowledge, and other considerations. Conference
calls are held daily between route managers and the sales force to
ensure SECs are raised or lowered appropriately. If a disruption
causes SECs to be lowered unexpectedly (i.e., if there is a large
unexpected cancellation), a flight alert message is sent to
commercial organizations to attract more cargo to that flight. If
the margin on the requested shipment exceeds (is less than) the
SEC, the flight is accepted (rejected). If the booking involves
multiple legs, the same principle is applied, now to the sum of the
legs. The margin requirement is updated and incorporated into their
information systems for transparency. KLM Cargo continues to
improve the base of their margin management systems. They
continually seek to improve upon their existing foundation by
introducing new mechanisms so as to protect high margin cargo and
eliminate low margin cargo, manage the relation between SEC and
price, and to invest in upgraded systems to improve the robustness
of their existing systems.
-
39
VI. Security
While not as prominent as with passenger security, cargo
security has recently been under considerable scrutiny over its
perceived vulnerability. This can be seen from the 108th Congress
where some have called for screening of 100% of all cargo aboard
passenger planes (see The Aviation and Transportation Security Act,
P.L. 107-71), which nearly all experts in the industry will render
as infeasible. However, there have been a number of policy changes
recently calling for increased security measures. Among these
include the TSA to at least tripling the amount of cargo placed on
passenger aircraft that has been inspected (FY2005 Homeland
Security Appropriations Act P.L. 108-334). Another calls for the
TSA to pursue screening technologies and enhance security
procedures as recommended by the 9/11 Commission (National
Intelligence Reform Act of 2005, P.L. 108-458). Security concerns
by no means unique; analogous reforms have been adopted in Germany,
the U.K., Singapore, among other locations. While 100 percent of
cargo is screened, far less than that is inspected. Screening
refers exclusively to the known shipper program where physical
inspection. Inspection is done a number of ways (credentialed
agents, trained canines, biometric technologies, etc.). Here we
seek to discuss issues pertinent to security, and the future of
security design.
A. Air Cargo Security Risks
Let us first highlight the risks associated with air cargo
security.
1. Explosive and Incendiary Devices From the Congressional
Research Service
(CRS) Report to Congress in a mimeo updated January 26, 2006
(pp. 4-5):
Undetected explosive or incendiary devices placed in air cargo
are potential threats to aircraft. Experts have warned that air
cargo may be a potential target for terrorists because screening
and inspection of air cargo is currently not as extensive as
required screening of passengers and checked baggage. Cargo carried
aboard passenger aircraft may be at particular risk since passenger
aircraft are generally regarded as highly attractive targets to
terrorists and have been attacked in the past. It has been reported
that TSA considers the likelihood of a terrorist bombing of a
passenger airplane to be between 35% and 65% based on 2002
intelligence reports, and TSA believes that cargo is either likely
to become, or already is, the primary aviation target for
terrorists in the short term While cargo as a means to place
explosive or incendiary devices aboard aircraft has historically
been rare, heightened screening of passengers, baggage, and
aircraft may make cargo a more attractive means for terrorists to
place these devices aboard aircraft, including all-cargo aircraft
as well as passenger aircraft, in the future. Investigations have
suggested that al Qaeda terrorists had an interest in bombing
all-cargo aircraft prior to September 11, 2001, and were planning
to bomb U.S.-bound cargo flights in an operation run out of the
Philippines
-
40
2. Hazardous Materials about 75% of all hazardous materials
shipped vis--vis aircraft are carried on cargo planes while the
remaining 25% are shipped on passenger aircraft13. There are
significant risks associated with shipping hazardous materials that
are not declared leading to improper handling and storage. This can
be seen from the May 11, 1996 crash of a ValuJet DC-9 over the
Florida Everglades. The National Transportation Safety Board
determined that improperly carried oxygen generators ignited in one
of the planes cargo holds.
3. Cargo Crime The U.S. General Accounting Office estimates that
loses
attributable to cargo theft across all transportation modes are
between $10 and $25 billion in the U.S. alone, which a nontrivial
share of this is from air freight. Crimes generally includes either
theft of goods and the smuggling of contraband, counterfeit, and
pirated goods through a distribution network. According to the CRS,
there have been major theft rings at JFK Airport in New York, Logan
Airport in Boston, and Miami International Airport. A recent review
of transportation security needs has focused on six components to
improve cargo security so as to abate cargo crime.
4. Aircraft Hijacking and Sabotage Of course this area remains a
great concern
in a post 9/11 world. Many have argued that hijackings of
all-cargo planes remain relatively more attractive given the recent
improved security measures taken with respect to passenger
aircraft. While historically rare, there have been some instances
of hijacking of freighters.
B. Known Shipper Programs
One of the most important components to the security process is
the so-called known shipper program. While this may be called
something differently in other countries, the premise is that once
a shipper has built a sufficiently high, cargo would be
pre-screened and subject to lax security measures. The known
shipper program has evolved as the principal means for
pre-screening cargo. They were established initially to
differentiate trusted shippers known to either a freight forwarder
or an air carrier. Therefore containers from unknown shippers would
undergo further screening and inspection. Currently in the U.S.
cargo shipments from unknown shippers are prohibited on board
passenger aircraft. The profiling procedure from the known shipper
program is not that unlike passenger profiling, which is used in
passenger security. The exact policies of the known shipper program
vary across countries. Let us look at a few and how they differ.
United States Today there are more than 400,000 known shippers in
the U.S. Most estimations show that between four and five percent
of all cargo is inspected.
13 Source: U.S. General Accounting Office, Aviation Safety:
Undeclared Air Shipments of Dangerous
Goods and DOTs Enforcement Approach, GAO 03-22, January,
2003.
-
41
There are generally two prominent criticisms of the U.S. system
that are being focused on improving. The first, critics argue, is
that the discretionary basis upon which shippers are classified as
trustworthy. They argue that there is little oversight as
forwarders and carriers have authority to accept/reject shippers
into the program. The second criticism is the lack of a centralized
database. Because of the preceding sentence, there are frictions
for the TSA to monitor known shippers. The TSA has issued a
proposed rule that would make consolidation of known shippers into
a centralized database a requirement.
Currently, shipments from unknown shippers are prohibited from
being transported on passenger aircraft. Additionally, both
carriers and forwarders must refuse to transport any cargo from
shippers (irrespective of whether they are known or not) that
refuse to give consent for searching and inspecting cargo. European
Union The most noteworthy observation about the EU regulated agent
program is that all shipments who do not qualify as a regulated
agent must be kept in storage by airfreight carriers for five days
before they are eligible to be transported. This was implemented in
2006 and other countries are monitoring the results carefully.
Moroever, there have been increased training requirements for
security personnel as well as freight documentation. The latter
poses challenges as firms are forced to modify IT systems
accordingly. Hong Kong In March 2000, Hong Kong implemented the
Regulated Agent Regime, or RAR similar to the known shipper program
in the U.S. While a non-regulated agent still has the ability to
ship cargo subject to substantially higher security controls, these
types of shipments constitute a negligible share of all cargo
shipped from Hong Kong. At HACTL, over 95% of all cargo originating
in Hong Kong is shipped from a registered agent. Regulated agents
are likely to have their status stripped if either there are
discrepancies on the air waybill, or more prominently if dangerous
or hazardous materials are mislabeled or mishandled.
C. Air Cargo Security Technology
Given the joint increase in both the (expected) volume of air
cargo flown and security concerns, a greater share of cargo can be
inspected only when there are sufficient technological advances.
Here we describe current technologies implemented in air cargo
security and where the technologies are moving toward to
accommodate future security. The National Intelligence Reform Act
of 2004 (P.L. 108-458) has directed the TSA to develop technologies
of air cargo security by authorizing $100 million annually from
2005-2007 for research and development of upgrading the existing
security systems.
-
42
A number of technological advancements have already been made,
yet still await implementation in air cargo security. Each of these
was reported by the CRC (see Elias 2006)
Tamper-Evident and Tamper-Resistant Seals
Various tamper-resistant technologies already exist in cargo
shipments, but advancements have recently been made in electronic
seals that would allow more immediate detection of tampering. X-Ray
Screening
The most commonly used systems in the screening of cargo is
x-tray technologies. One of the focal points moving forward is
advancing current technologies that minimize human factors. To this
extent, threat image projections (which superimpose images on x-ray
scans) are one of the more promising advancements made. Explosive
Detection Systems
Current explosive detection systems exist that use x-ray
computed tomography in scanning objects, along with computational
algorithms that estimate the probability of a threat given the
density and shape of the package. Advancements are being made to
include the possibility of scanning large objects (currently there
are limitations as to the size of objects that can be scanned).
Chemical Trace Detection Systems
These mechanisms are used in passenger screening, but are far
less common in screening cargo considering these systems are labor
intensive and time consuming. TSA has been contemplating extending
the technology currently implemented in passenger screening to
cargo screening. Given the labor input, this would probably be a
secondary source of screening since it would be impractical to
search a significant share. Nevertheless, this is under
consideration and is less developed. Neutron Beam Technologies
While still being developed, neutron beam technologies remain
one of the more exciting advances in security. These systems send a
pulse neutron generator to an enclosed object that initiates
multiple low energy nuclear reactions with the chemical elements
comprising the object. Then the detector can measure this reaction
and the gamma-rays emitted from the reaction, and information can
be inferred from these measurements. While a promising means of
securing the air cargo process, there are substantial costs
involved in developing such methods. It is estimated from the
General Accounting Office that with currently available
neutron-based technology, each machine would cost about $10 million
and would require about one hour per container. Hardened Cargo
Containers
This is an attractive means to abate concerns about explosive
devices. The 9/11 Commission suggested increasing the usage of
hardened containers. Hardened
-
43
containers became popular after the 1988 bombing of Pan Am
flight 103 over Lockerbie, Scotland. There currently exists
hardened unit loading devices, although carrying these may induce
inefficiencies from their increased weight which reduces available
payload, as well as increased procurement cost for hardened
containers. Therefore, current challenges are to strengthen the
durability of these containers while introducing lighter material
to offset these inefficiencies. The airlines are likely to impose a
law requiring substantial increases in the use of hardened
containers because of the crowd out effect of capacity. However,
there are interesting questions to be raised, such as trading off
lower capacity for lower security costs of unknown shippers (since
their goods would be placed in hardened containers, the need to as
stringent security would not be as high). Biometric Screening
Technology In order to ameliorate the problems associated with air
cargo security risks, as in section VI.A (much of which has been
caused by credentialed individuals with access to cargo loading
areas), biometric screening technologies have been advanced. A
pilot program has been established at some selected facilities
whereby fingerprinting, retinal scans, and facial pattern
recognition are being evaluated of transportation workers. The
National Intelligence Reform Act of 2004 contains extensive
provisions requiring the TSA to enhance the usage and
implementation of biometric systems at airports (P.L. 108-458).
-
44
VII. Concluding Remarks and Future Work
Even in the presence of substantially higher expectations in oil
prices, the air cargo industry still is expected to grow at a
sufficiently high rate so as to induce more pressure in an already
highly-capacitated system. Consequently, there are a number of
areas for work to accommodate this growth, or at least to develop a
greater understanding certain areas. I suggest four principal areas
that seem particularly attractive. (i) The air cargo network is a
very complex one with the number of possible routings, schedules,
consolidation points, and stations serviced too man
